It’s difficult to make an argument for the Fed wanting the price of gold to increase. Not since March 2020 when they announced major QE and floored interest rates has gold been supported. Perhaps the shorts have let Powell know they have dumped their positions and gone long.
We aren’t there yet, but it is intriguing to see the reaction from the market on Powell’s comments. If we follow the rule book, announcing the timeline for tapering should have sent gold and silver lower, should have sent yields higher, and should have sent the dollar index higher.
Yet gold and silver are considerably higher from before the Fed announcements, Yields have absolutely tanked, and the DXY is now in the red since this was announced. Even more intriguing is the stock indexes that have just continued to shoot higher.
So why would that have happened? Was it a massive buy the rumour sell the fact style traders’ play? No. It was all about Powell’s talk on interest rates, and not setting in stone the taper timeline and ambiguous comments around the quantity.
Powell has been believed every time he has mentioned transitory inflation, and the markets have priced that in. What he has also been an advocate of is holding off take off on rates until “maximum employment” has been met.
Every time this has been drilled into there has been a major prevarication. Does he mean pre Covid levels? If so there is a long, long way to go. The markets may have realised this and reacted accordingly.
Friday’s jobs report should also have been bearish for gold. It was the opposite. So it would appear the focus is on inflation. One thing markets hate is uncertainty and now the taper timeline has been revealed as its worst case scenario, the only thing left to focus on is interest rates.
It is extremely important to understand that the US is still spending its way out of the recession, and with the $1 trillion bill just passed is a sign of things to come with the huge schemes on Biden’s list as further proof of this. The key takeaway here, is The Fed are not planning on reducing their balance sheet by tapering.
At the end of June 2022 when this will allegedly be paid off the Fed’s balance sheet will still be north of $8 trillion. With the US debt clock currently weeks away from by passing $29 trillion this leaves a staggering hole; particularly as the US is paying out more than it receives yearly. It both wants and needs inflation.
The problem for the Fed is they have a very big choice to make: Save the dollar or save the economy – they can’t do both. With fiat currencies debasing across the globe, and the likely introduction of CBDCs in the not too distance future, one would have to ponder how the world could possibly imagine saving a currency would be met with popular approval over jobs and the economy.
Let’s be clear here, another set of subdued GDP numbers is likely, and two consecutive quarters of negative growth is a recession. So what do governments do? Allow it, or prop up the economy by massive amounts of QE? Back to square one we go. The debt spirals out of control and the dollar – like every other currency across the globe will get destroyed.
Inflation is debasement of currency intentionally created by governments and world leaders via policy and QE. What we have seen is the effects of inflation rising across the globe. All metrics suggest this is here to stay, and how the world leaders will fall on their transitory swords will remain to be seen. The last thing they can do is raise rates.
Remember November is notoriously a bad month – exasperated last year by the announcement of the vaccine. The price action last Thursday and Friday for both metals was extremely positive. This isn’t to say the 7 years of poor Novembers is over this month. That said we see more bullish fundamentals now than last year certainly.
The big question is, has the Fed now caused traders to change their mind on fundamentals for gold? We believe the turning point for gold and silver is very, very close, and a rally into year end and beyond likely. $1835 is the level to watch for the yellow metal. Consecutive closes above this marker will support a rise much higher.